If a student borrowed $5,000 at 6 percent to pay for this year's college expenses and the annual inflation rate turns out to be 8 percent, then the student's purchasing power for the year has increased.

Question

Quizplus · Accepted Answer

The real interest rate is effectively negative in this scenario (-2%), meaning the value of the money borrowed decreases less rapidly than the general price level increases, thus increasing the borrower's purchasing power.

If a Student Borrowed $5,000 at 6 Percent to Pay